New York, December 03, 2012 -- Moody's today affirmed the ratings of Buckeye Power Inc. (Buckeye), including all senior secured ratings at A2 and the issuer rating at A3, and revised the rating outlook to stable from negative. At the same time Moody's affirmed the ratings of Buckeye's financing subsidiary, Buckeye Power Generating LLC (BPG), including the Baa1 senior secured term loan rating and Baa1 issuer rating, and revised the rating outlook to stable from negative.
"The affirmation of Buckeye's ratings and the change to a stable rating outlook reflect Moody's view that the cooperative's trend of weakening credit metrics due to debt financing of a now completed heavy capital program has bottomed out", said Kevin Rose, lead analyst for Buckeye. "Moody's believes that Buckeye's credit metrics will improve over the next several years as it enters a period of significantly lower capital expenditures that will result in positive free cash flow", Rose added. Steps taken by Buckeye to improve its liquidity by supplementing internally generated cash flow with a four-year committed $200 million unsecured credit facility with a syndicate of six banks led by National Rural Utilities Cooperative Finance Corporation (NRUCFC) is also considered a credit positive factor.
The affirmation of BPG's ratings, which maintains the one-notch difference between the issuer ratings of Buckeye at A3 and BPG at Baa1, and the change to a stable rating outlook for BPG reflect the subordination of the debt taken on by BPG to finance Buckeye's investment in Ohio Valley Electric Cooperative (OVEC; Baa3 senior unsecured, stable outlook). The cash flow to service the BPG debt is received from Buckeye under the terms of a purchased power agreement between the entities and as such, we view the rating of BPG as being linked to that of Buckeye. While the BPG investment in OVEC represents an important component of Buckeye's overall electric generating profile, the debt at BPG is not specifically guaranteed by Buckeye and as such could represent a junior claim relative to obligations under Buckeye's existing mortgage indenture.
Other long-standing credit positive traits underpinning Buckeye's investment grade credit profile include the cooperative's self-regulated rate-setting business model, the predictable revenue streams under long-term wholesale power sales contracts in place with its members, its competitive wholesale electric rate, and the ability to meet a significant amount of its members' power needs with owned electric-generation assets. With significant environmental-related investments completed in recent years, the predominantly coal based generation portfolio is currently well positioned to continue providing competitively priced base load power to its members as existing rates include the cost effects of these investments.
As the more moderate prospective capital spending program unfolds during 2013-2017, Moody's anticipates that Buckeye's debt level will decline so that its funds from operations (FFO) to debt and equity to total capitalization metrics will be restored to at least 6% and 20%, respectively, by FY 2014. These levels are in line with the A rating category under the U.S. Electric G&T Cooperative Rating Methodology. The anticipated improvement in credit metrics also assumes continuation of expense reduction initiatives, benefits from reduced OVEC demand charges following extension of the inter-company power agreement, and other restrictions on certain general and administrative spending. Moody's also incorporates a view that member rate increases will be implemented in a timely manner, if necessary, to achieve anticipated improvement in credit metrics and maintain currently adequate liquidity. To the extent that external financing requirements may develop, Moody's expects that Buckeye will follow its past practice of relying on loans from RUS and other sources, including loans from CoBank and NRUCFC, to meet its needs.
Buckeye's ratings could be upgraded over the next 18 to 24 months if key metrics improve beyond current expectations such that FFO to debt and equity to capitalization can be maintained in excess of 8% and 22%, respectively, for a sustained period. Given our view about the linkage to Buckeye's rating, we would expect BPG's rating to be upgraded if there is a positive rating action at Buckeye.
Buckeye's rating could face downward pressure if its credit metrics do not improve as anticipated so that FFO to debt and equity to total capitalization return closer to 6% and 20%, respectively, on a sustainable basis. Given our view about the linkage to Buckeye's rating, we would expect BPG's rating to be downgraded if there is a negative rating action at Buckeye.
Headquartered in Columbus, Ohio, Buckeye Power, Inc. is a not-for-profit electric generation and transmission cooperative owned by and supplying power to its 25 distribution cooperative members in the state of Ohio. Buckeye owns approximately 2,400 MW's of electric generating capacity and reported revenues of $627 million in fiscal year 2012. Buckeye Power Generating LLC is a special purpose financing vehicle, which is wholly-owned by Buckeye Power, Inc.
The principal methodology used in this rating was U.S. Electric Generation & Transmission Cooperatives published in Decemeber 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Kevin G. Rose Vice President - Senior Analyst Infrastructure Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653A.J. Sabatelle Senior Vice President Infrastructure Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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